Papandreou faces the toughest challenge of his political life this evening after it was announced his planned referendum on the rescue package had been cancelled.

He had hoped that by putting the package to the people he would be able to secure their support for a series of austerity measures that would accompany the money.

German chancellor Angela Merkel and French president Nicolas Sarkozy are concerned that the failure to solve the Greek debt crisis swiftly could lead to the spreading to other more economically important eurozone nations including Italy.

Papandreou stunned fellow European leaders and the markets when he announced he would put the eurozone funded multi-billion euro rescue package to a public vote.

But after a day of chaos and confusion in Athens on Thursday, Papandreou announced that the referendum would be scrapped after the main opposition party, the New Democracy party, agreed to back the deal.

Papandreou's Pasok party has a slender majority of two in the Greek Parliament and several of his own MPs had indicated they would vote against him.

If successful Papandreou will aim to form a coalition government of national unity. If he loses the vote there is likely to be an election.

But while supporting the bail out it is unlikely the opposition would want to be part of a coalition with Papandreou at its head.

On Thursday Antonis Samaras, the leader of the conservative New Democracy opposition party, called for the bail out to be agreed and for a snap election, in which his party is likely to win the most seats.

"I'm asking for the formation of a temporary, transitional government with an exclusive mandate to immediately hold elections. And the ratification of the bailout deal from the current parliament," he said.

This morning Greek finance minister Evangelos Venizelos formally told EU leaders gathered in Cannes that the referendum had been cancelled.

The chaos in Greece has overshadowed the G20 meeting in France, and EU leaders are desperate stability to re-established in Athens.